1. Oil and the Global Economy

London oil prices surged briefly to nearly $102 a barrel last Monday on news of the EU’s Spanish bank bailout. The markets quickly realized, however, that the bailout was only a harbinger of more bailouts to come, and oil prices quickly settled to the vicinity of $97 barrel where they remained for the rest of the week. NY oil followed a similar pattern, trading in the vicinity of $83 for most of the week. US natural gas prices spiked by nearly 40 cents per million Thursday on news that stockpiles were not growing as rapidly as expected. Prior to the spike, NY natural gas futures had fallen to the lowest since April with drilling for gas dropping rapidly and electric utilities switching away from coal.

The week’s news was dominated by the various EU financial crises and the OPEC meeting. After much moaning about the recent drop in oil revenues and the need for the Saudis to cut production, OPEC agreed to keep the current 30 million b/d production ceiling and attempt to reduce the 1.6 million b/d of excess production. Giving the magnitude of the events going on in Europe and the Middle East, this decision will likely have little impact on production. As one paper pointed out, “OPEC is now a cartel of one,” with only the Saudis having real influence on production. The rest are pumping as much as they can in an effort to maintain state budgets.

Continuing bad economic news is leading to speculation that the Federal Reserve and other central banks will soon begin another round of stimulus measures that will support oil prices. The overriding concern at the minute, however, was best expressed by analysts at Credit Suisse who forecast that oil prices would fall to $50 a barrel later this year if the European crisis gets much worse.

2. Europe at a turning point

Sunday’s parliamentary vote in Greece apparently gave a slim majority to a coalition of two pro-austerity parties. It is hoped they should be able to form a government capable of implementing the policies necessary to keep the EU’s bailout money flowing and prevent an untimely Greek exit from the Eurozone. Another round of bailout funds for Greece cannot happen too soon, for the government is close to being unable to pay its bills. Gazprom is threatening to shut off gas supplies. Imports of food and medicines are drying up; unemployment is soaring; and nobody is paying much in the way of taxes. All this cannot go on much longer. Whether another injection of bailout money does more than push the problem down the road a few months remains to be seen. For now, however, a Greek exit from the Eurozone does not seem imminent.

Beyond that, it is difficult to predict. The EU is putting in measures to control contagion but with interest rates in Spain and Italy already at record levels and Spain likely to request an EU bailout of its own shortly, there simply may not be enough resources around to prevent further deterioration of the EU’s economy.

No matter what happens with Greece in the next few weeks, the country is in for some tough economic times. Major foreign companies are already cutting back on their Greek operations and European banks are pulling out assets for fear that debts will never be paid. Insurers are now refusing to cover the import of basic goods such as food stuffs into Greece.

Sunday’s vote seems likely to give a boost to oil prices, but as was the case with the Spanish bank bailout last week; this may not last very long.

3. The Iranian confrontation

The next round of talks between Iran and the five permanent members of the UN Security Council + Germany opens in Moscow today. Current indications suggest that the meetings will not go well and that the full weight of sanctions on Tehran will come into effect on July 1st. The West is demanding that Iran’s enrichment of uranium be reduced and inspected to the point where it is unlikely that Tehran would be able to quickly build a stock of nuclear weapons. The Iranians seem to want the sanctions to be lifted and their inalienable right to enrich uranium be guaranteed in return for increases in inspections.

Indications are that the sanctions on Iran are already having an effect with the IEA reporting that Tehran’s exports are already down by 1 million b/d from the 2.5 million b/d it was shipping out at the end of 2011. Last week the US announced that seven countries including India and South Korea had been exempted from harsh US economic sanctions as they have been making a good-faith effort to reduce their consumption of Iranian oil. Notably, China was not among the exempted nations, but there are already indications that the Chinese have reduced or plan to reduce their imports from Iran while ostensibly opposing the US and EU unilateral sanctions. Beijing obviously recognizes the danger to its economy that would result from hostilities in the region and sees sanctions as a better alternative.

Current estimates are that, when in full effect, the sanctions could reduce Iranian oil exports by 1.3 million to 1.5 million b/d, thereby depriving the country of some $4.5 billion in oil revenues a month. Six months back there was much talk that sanctions could never be effective, and if so the damage wrought by the loss of Iranian oil and higher prices would make the effort counterproductive. With the recent increases in global oil production and the slowing of the increase in global demand, it is starting to look as if the loss of circa 1.5 million b/d can be swallowed by the global economy without a major increase in prices.

With the threat of a unilateral Israeli strike on Iranian nuclear facilities looming in the background, the West is unlikely to give to lift any sanctions without clear movement on the Iranian side. Moscow would love the prestige of brokering a settlement, but is currently bogged down with untenable support for the Assad government in Syria, and really does not have much leverage with Tehran in the matter.

The whole situation is bizarre and still dangerous. Nearly everybody on earth including the Iranian government and its supreme leader Ayatollah Khamenei are saying that Tehran should not have nuclear weapons, yet when it comes to verifying such a policy, the Iranians are seemingly willing to risk major economic setbacks in the name of saving face and maintaining self esteem by not backing down to the demands of the West and Israel.

4. An IEA appraisal

The Agency believes that thanks largely to a 1.4 million b/d increase in OPEC output since last winter, global oil production is running about 2 million b/d above demand in the current quarter. It appears that in addition to steadily increasing OECD stocks, China has started to build its strategic reserves. This is likely out of fear that the various problems simmering in the Middle East could develop into export shortages in the months ahead.

Despite the $25 a barrel drop in oil prices since March, oil is still close to $100 a barrel and in historical terms is still acting as a drag on economic growth and household budgets. This in turn dampens the prospects for rapid economic recovery in the near future.

The IEA is already looking at what might happen if Europe falls into a major recession slowing global economic growth. Demand for oil in southern Europe is already dropping rapidly. Preliminary figures for April show demand in Greece down by 16 percent, Italy by 15 percent, and Spain by 8 percent all year over year. Currently, the IEA is projecting global GDP growth for 2012 at 3.5 percent vs. 3.7 percent in 2011. If the Eurozone turns sour in the next six months, global GDP could fall to as little as 2.3 percent. Remember, China is still thumping along at least 8 percent annual GDP growth no matter what happens to the rest of the world.

If the global GDP does fall to the worse case, then global demand for oil in 2012 would like increase by only 340,000 b/d as opposed to the 820,000 b/d currently forecast. Under this assumption, the OECD demand would actually fall by 500,000 b/d this year, while non-OECD demand would increase by 840,000 b/d.

Quote of the week

"We like to think that the reason we enjoy our high standards of living is because we have been so clever at figuring out how to use the world's available resources. But we should not dismiss the possibility that there may also have been a nontrivial contribution of simply having been quite lucky to have found an incredibly valuable raw material that for a century and a half or so was relatively easy to obtain."

- James D. Hamilton

The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)

Iran and Iraq are forming a strengthening alliance inside OPEC, raising concerns among moderate Arab Gulf producers like Saudi Arabia and increasing the potential for discord in the oil producers' group. (6/16, #7)

The Iraqi and Jordanian governments plan to meet in July to discuss construction of a natural gas pipeline. (6/16, #13)

Delta Air Lines plans to become a seller in the US jet fuel market and push prices lower after acquiring a refinery in Pennsylvania. (6/16, #20)

The fuel that powered the US from the industrial revolution into the iPhone era is being pushed aside as utilities switch to cleaner and cheaper alternatives. The share of US electricity that comes from coal is forecast to fall below 40 percent for the year - the lowest level since the government began collecting this data in 1949. (6/16, #22)

Pipeline company Kinder Morgan said a multimillion-dollar project was in service to carry oil from the Eagle Ford shale play to the southern US coast. Kinder Morgan said the $215 million pipeline can transport as much as 300,000 b/d from Eagle Ford. (6/16, #24)

Drilling operations in the arctic waters off the coast of Alaska might be scaled back if there is late ice cover in the region this summer. (6/16, #25)

Houston's Apache Corp. has announced what it calls the "best unconventional gas reservoir in North America." Apache, the second-largest US independent producer, says the find in the Liard Basin in northeast British Columbia contains enough gas to match Canada's entire current output for almost a decade. (6/16, #26)

Exxon Mobil has ended its search for shale gas in Poland after two wells failed to yield flows big enough to make development profitable. (6/16, #28)

The Scottish government has issued a rare denial for a wind power project, turning down a bid to construct 30-turbine wind farm in the country's Highlands. (6/16, #31)

Amid the profound political changes sweeping the Arab world, there are moves to rewrite contentious water-sharing agreements that are becoming a major source of friction in the Middle East as water supplies shrink. (6/15, #9)

An official from South Sudan said he anticipates funding from a Japanese company for an oil pipeline to reach the east African coast. (6/15, 9)

China is hoarding crude at the fastest rate since the Beijing Olympics four years ago as the slump in international prices prompts it to import unprecedented volumes even as refining slows. The world's second-biggest oil consumer built up a surplus of about 90 million barrels of crude in the first five months of the year. (6/15, #16)

The Bureau of Safety and Environmental Enforcement will pay the extra cost to have inspectors on board the Kulluk and Noble Discovery drilling rigs, which Shell has proposed to use for its offshore Alaska drilling plans this summer. (6/15, #19)

The idea that a wave of LNG produced from US shale gas fields is ready to crash over Asian consumer markets, disrupting traditional supply routes and oil-linked pricing mechanisms doesn't hold much water with producers in the Middle East, Australia and Southeast Asia. (6/15, #20)

In the deadliest day in Iraq since the withdrawal of US military forces in December, a series of explosions that mostly targeted Shiite Muslims amounted to an emphatic demonstration of the still-potent capabilities of the Sunni insurgency and a reminder of the instability left behind by American forces. (6/14, #4)

The International Energy Agency said the world's clean energy investments are sorely lacking and this week called for an additional $36 trillion of funding by 2050. In a sharply-worded introduction to a 700-page report, IEA Executive Director Maria van der Hoeven said governments and private industry need to do far more if the world is to hold global warming to what most scientists say is an acceptable level. (6/14, #15)

Norwegian oil firm Statoil discovered another big gas deposit off Tanzania, putting it within reach of having the gas needed for a project analysts say could cost over $10 billion to develop. (6/14, #21)

Venezuela surpassed Saudi Arabia to become the world's largest holder of proven oil reserves, a resource that President Hugo Chavez promises to tap if he gets re-elected in October. (6/13, #10) (6/14, #23)

India will buy an additional 5 million mt of Saudi crude in the current fiscal year. The additional volume will take India's total purchases of crude from Saudi Arabia to 37.6 million mt in the year which began in April. (6/14, #24)

Japanese utility companies used 22 percent more liquefied natural gas compared with last year as nuclear operators have gone dark. (6/14, #25)

China will take swift counter-measures that could include impounding European aircraft if the European Union punishes Chinese airlines for non-compliance with a scheme to curb carbon emissions. (6/12, #17)

Japanese Prime Minister Yoshihiko Noda called for the restart of two of the country's nuclear reactors in what would mark the first restart of idled reactors since last year's Fukushima nuclear power plant disaster. (6/12, #18)

North America is expected to become self-sufficient in energy by 2025 ConocoPhillips Chief Executive Ryan Lance said Wednesday. The U.S. has been experiencing a boom in natural gas extracted from shale over the past two years, and Lance said the country already has no need to import any natural gas. (6/13, #8)

French energy company Total said most staff members have returned to an oil rig that leaked natural gas into the North Sea off Scotland. (6/13, #22)

Coal India plans to import up to 30 million metric tons of coal this fiscal year as part of efforts to meet rising domestic demand and mitigate power shortages. (6/11, #14)